The elements of business law : with illustrative examples and problems

Prefatory Note

An effort has been made in this book to state as concisely and clearly as possible the leading and fundamental principles of business law, and in place of extended abstract explanations of them to substitute simple concrete examples showing them in their actual application to business transactions. In order that the conclusions drawn in these examples may be verified and not rest upon mere conjecture, the examples have for the most part been taken from cases decided in the courts. At the end of each chapter are given a number of concrete problems without the conclusions, intended to afford an exercise in the application of the principles drawn from the text and the examples. These also have been taken mainly from the decided cases. The drill in the examples and problems should be constant and thorough, and will be found far more interesting and instructive and far better calculated to develop intelligent thinking and reasoning than the memorizing and repeating of abstract dogmatic statements.

The arrangement of the book has kept in view a logical analysis and unfolding of the subject. But if for any reason it should be thought desirable to deal with negotiable instruments earlier in the course, it would do equally well to interchange Parts II and III, giving the latter first.

Should the book prove too extended for the time allotted. Parts V and VI may be omitted, although it would be well to cover, if possible, the chapter on partnership. The last three chapters do not fall clearly within the scope of business law, and for this reason, and because it has been the object not unduly to extend them, the examples and problems have been for tlie most part omitted and numerous facsimiles of formal documents substituted. While these chapters deal with somewhat technical matters, the subjects involved are of great importance to all who have property interests.

iv PREFATORY NOTE

The glossary of Ic^al terms should be constantly referred to, in order that the nomenclature of the law may be correctly understood. While the glossary has been made as complete as practicable, it would be well to supplement it by a good law dictionary, in which more extended definitions and explanations may be found.

The work is based necessarily upon the common law. While the nature of statutory ciianges has been indicated, the precise provisions of statutes are rarely given, because these vary so widely in the different states that such a course would prove misleading. The difficulties of an accurate statement of the statutory law in a book of this size are in fact insurmountable. Should the teacher be fortunate enough to secure the cooperation of a local attorney, some progress in this direction might be made.

It will be found in setting examinations that concrete problems are better calculated to disclose the practical value of the student's work than questions calling mainly for definitions, rules, or abstract statements. E W H

Cornell University College of Law July 3, 1905

Preface To Second Edition

During the eleven years which have elapsed since the first edition of this book was published there have occurred many changes in American law which render desirable a revision. Numerous alterations in the seventeenth section of the Statute of Frauds; the increasing importance of the antitrust legislation; several amendments to the federal bankruptcy law ; the adoption by many states of the various uniform laws, notably the Uniform Sales Act, Uniform Warehouse Receipts Law, Uniform Bills of Lading Act, and Uniform Stock Transfer Act ; the recent amendments to the Interstate Commerce Act regarding carriers ; the approval by the Interstate Commerce Commission of a new form of bill of lading ; the passage of the Federal Reserve Act ; changes in the rates of interest, especially in the Western states ; the almost complete abolition of days of grace ; the rapid spread of the Negotiable Instruments Law ; the revolution in the law of master and servant caused by the Employers' Liability and Workmen's Compensation acts ; and the increase in the popularity of the Torrens system of land registration — all have necessitated changes in the text. Many other minor alterations in the interest of accuracy and completeness have been occasioned by the growth of the law.

It would be difficult to improve upon the admirable lucidity and compactness of Dean Huffcut's style. Hence the new matter introduced relates largely to substance and not to diction.

I desire to add that it is a particular satisfaction to be accorded the privilege, by this revision of the work of the late Dean Iluffcut, of paying a meed of gratitude to a teacher for whom I entertained a warm personal regard, and whose legal exposition, in classroom or in printed text, was distinguished by remarkable analytical power and by singular clarity

and accuracy of expression.

GEORGE G. BOGERT CoRNKi.i, Umvkrsity Coi,lf.c;e ov Law Ithaca, New York

IVIicrosoft Corporation

CHAPTER I. PRELIMINARY TOPICS Business Law and Cognate Subjects SECTION

PAflE

1. Business ^

2. Law ^

3. Business law -

4. Divisions of the law 3

5. Property 4

6. Legal obligations 4

7. Courts "

8. Procedure °

9. Scope of this work 9

PART L THE PRINCIPLES OF CONTRACT CHAPTER II. FORMATION OF CONTRACTS

10. Definition of contract 1 1

11. Essentials of enforceable contract 12

I. Agreement

12. Contracts begin in agreement . 12

13. Classes of agreements '3

14. Agreements originate in some form of offer and acceptance ... 13

II. Competent Parties

15. Infants '7

16. Insane persons '°

17. Married women '9

III. Consideration

18. Necessity of con.sidcration '9

19. The consideration need not equal the promise in value 20

20. A past consideration will not support a promise 21

21. The consideration must be legal 22

vii viii CONTENTS

22. Statute of Frauds 23

23. Contracts under seal 25

V. Lw.AI.lTY OK OrJECT

24. Contracts made illegal by statute 27

25. Wagering contracts 28

26. Contracts illegal at common law 30

27. Effect of illegality upon contracts in which it exists 32

VI. Reaijty of C0N.SENT

28. Mistake 33

29. Fraud and misrepresentation 35

31. Undue influence 37

Chapter III. Operation And Discharge Of Contracts

I. Liabilities and Rights of Third Parties

32. Liability of third parties 45

33. Rights of third parties 46

II. Assignment of Contracts

34. Assignment by act of the parties 46

35. Negotiability of certain contracts 47

36. Assignment by operation of law 48

III. Discharge of Contracts

37. Discharge by agreement, including performance 49

38. Discharge by impossibility of performance 51

39. Discharge by breach 53

40. Remedies for breach of contract 54

IV. Discharge in Bankruptcy

41. Insolvency laws not discharging debtor 56

42. Bankruptcy laws discharging debtor 56

43. The state insolvency laws 57

44. National Bankruptcy Law of i8g8 57

CONTENTS ix

Chapter IV. Sales Of Goods

I. The Contract

45. Definition and analysis 61

46. Statute of Frauds 66

II. The Title

47. \Vhen does title pass ? 6g

48. Specific or ascertained goods 70

49. Unascertained goods 72

50. Who has the risk.^ 74

III. Performance

51. Duties of the seller 75

52. Duties of the buyer 75

IV. Warranties

53. Definition and classification 76

54. Express warranties 76

55. Implied warranties 77

56. The rule of caveat emptor 79

57. Remedies for breach of warranty 80

V. Remedies

58. Rights of unpaid seller against the goods 81

59. Rights of unpaid seller by way of action for breach of contract . . 83

60. Remedies of the buyer ... 84

CHAPTER V. liAILMENT OF GOODS

61. Definition and distinctions 90

62. Classification of bailments 9'

I. P.ailments .solely for Penefit of One 1'arty

63. Pailmcnts for sole benefit of bailor 93

64. Bailments for bailee's sole benefit 95

X CONTENTS

11. MUTUAL-BliNlCKIT BAILMENTS

65. riedgc or pawn 97

66. Hailce hires an article of bailor 99

67. Uailor cngaj;cs bailee to keep, repair, or transport an article . . . loi

III. Sri-xiAL Cases ok Bailment for Keeping or Transportation

68. Innkeepers 104

69. Common carriers of goods 107

IV. Cases not Strictly of Bailment

70. Public carriers of passengers and baggage 116

7 1 . Telegraph and telephone companies 118

Chapter VI. Insurance Contracts

72. Nature and kinds of insurance

73. Kinds of policies

74. Definitions

75. Characteristics

76. The insured must have an insurable interest

77. The contract of insurance is one requiring the highest good faith

78. Warranties

79. Statutory or standard policies

80. Marine insurance

Chapter VII. Credits And Loans

81. Capital and credit ; money and exchange ; payment 135

82. Interest and usury 140

84. Bank deposits 144

85. Loans and discount; security 145

Chapter VIII. The Contract Of Guaranty

86. Guaranty defined 149

87. A guaranty must be in writing 150

88. Consideration r 50

89. Notice of acceptance by guarantee 151

CONTENTS xi

90. Notice to guarantor of the default of the principal 151

gi. What will discharge the guarantor 152

92. Guarantor's liability 155

93. Guarantor's remedies 1 55

Chapter IX. Negotiable Instruments

I. Nature and Characteristics

94. Kinds of negotiable instruments I5"9

95. Characteristics of negotiable instruments 161

96. Definitions 163

97. Negotiable Instruments Law ... 170

IL Form

98. What a negotiable instrument must contain 170

99. What a negotiable instrument must not contain 172

100. Nonessentials 1 73

loi. Effect of blanks I74

102. Delivery I74

III. Negotiation

103. Negotiation; indorsement; delivery 175

104. Holder in due course I77

105. Rights of holder in due course i 79

IV. Maker's and Acceptor's Contract

1 06. Maker's contract on a promissory note 181

107. Acceptor's contract on a bill of exchange 181

108. Presentment of bill of exchange for acceptance 185

V. Drawer's and Indorser's Contract

109. Drawer's contract on a bill of exchange 186

110. I ndorser's contract on a bill or note 186

111. Presentment for payment ^^^

112. Notice of dishonor '9'

1 13. Protest '94

115. Position of indorser after liability is fixed 199 xu

CONTENTS

TARr IV. AGKNCV: Till-: CONDUCT OF BUSINESS rilROUGH REPRESENTATIVES

CHAl'TKR X. rRINCll'AL AND AGENT

Section I-age

1 1 6. Agency: its divisions and problems 205

I. Appointment ok Agents

I 1 7. Wlio niav appoint agents

1 18. Who may be an agent .

1 1 9. Form of appointment .

1 20. Ratification ....

121. Agency by necessity

122. Termination of agency

123. Irrevocable agencies

II. Obligations of Principal and Agent to Each Other

124. Obligations of principal to agent 213

125. Obligations of agent to principal 214

III. Liability of Principal to Third Parties

1 26. General Rules 217

127. Agent's apparent authority 217

128. Agents following customary calling 219

129. Undisclosed principal 220

130. Frauds by agent 222

IV. Liability of Agent to Third Parties

131. Where agent alone is liable 222

132. Where both principal and agent are bound 223

CHAPTER XI. MASTER AND SERVANT I. Injuries to Third Persons

133. Negligent torts by servants 227

134. Willful torts by servants 227

II. Injuries to Servants

135. Injury to one servant by another 228

136. The master's nonassignable duties 229

137. Employers' liability acts 229

138. Workmen's compensation and insurance acts 230

CONTENTS xiii PART V. BUSINESS ASSOCIATIONS

Chapter XII. Partnerships And Joint-stock Companies

139. Forms of conducting business 235

I. Partnerships

140. What constitutes a partnership 236

141. Rights and duties of partners as to each other 238

142. Powers of partners 239

143. Liabilities of partners 240

144. Rights and remedies of creditors 241

145. Dissolution 242

II. Joixt-Stock Companies

146. How distinguished from ordinary partnerships 243

147. How hke ordinary partnerships 244

Chapter XIII. Corporations

148. Definition and classification . 248

1 49. How a corporation is formed 248

150. Members 250

151. Directors 252

152. Officers and agents 253

153. Powers of a corporation 254

154. Stockholders' rights ~5S

155. Liability of stockholders 257

156. Reports of corporations . . , c""/

157. Receivers of corporations 258

I 58. Dissolution of corporations 258

PART VI. PROPERTY IN LAND AND MOVABLES

Chapter XIV. Real Property

I. Estatf:s in Real Property

159. Meaning of the term " property " 261

160. Estates in land; duration 264

161. Future estates in land : reversions and remainders 267

iC>2. Estates held jointly or in common 268

163. Equitable estates : trusts 269 xiv CONTENTS

11. Land: its Constituknts, Growths, and Fixtures

164. Extent of ownership : soil, air, minerals, waters 270

165. \'ef;;ctable products 270

166. Fixtures 271

III. Relative Rights ov Adjoining Owners

167. Fences: cattle trespass 273

168. Air and waters ; support of land 273

169. Easements 274

IV. Transfer of Interests in Lands

170. Contract of sale 274

171. Conveyances 276

1 73. Descent to heirs 280

1 74. Adverse possession 282

V. Mortgages and Liens

175. Mortgages of real property 282

1 76. Liens on real property 283

VI. Landlord and Tenant

177. The lease and its covenants 288

178. Defects, repairs, and waste 290

179. Assignment and subletting 291

180. Rent and remedies for nonpayment 291

181. Termination of lease 292

CHAPTER XV. PERSONAL PROPERTY I. Classification : Kinds and Estates

182. Classification 294

183. Property in animals 294

1 84. Trademarks ; good will ; names 295

185. Estates in personal property 296

11. Acquisition and Transfer

186. Acquisition by occupancy and by finding lost property .... 297

187. Accession and confusion 298

188. Transfer by gift 300

189. Other modes of transfer 302

INDEX 313

THE ELEMENTS OF BUSINESS LAW

Chapter I Preliminary Topics

Business Law and Cognate Subjects

1. Business. Business concerns itself with property, credit, and services, and with contracts pertaining to these things.

The term "' business " embraces every kind of industrial activity by which men acquire, manufacture, or otherwise produce property; by which they sell or transfer it; by which they store, transport, or insure it ; by which they borrow or lend money and give or secure credit ; by which they combine with others to these ends ; and by which they furnish or obtain services in these and similar enterprises. This is by no means an exhaustive list of commercial operations, but it indicates the variety and extent of those human activities that pass under the name of business.

2. Law. The term "law" includes all those rules by which courts are controlled in the administration of justice. The same rules must also govern men in their relations to each other, because if they be violated, the courts will either give reparation to the injured party or refuse to aid the one who has violated them.

Rules of law are of two kinds : first, those that have been worked out by the courts themselves in deciding actual cases brought brfore them by litigants ; and, second, those enacted by the legislatures. The first are known as the common law, and the second as statute law. The common law is sometimes called the unwritten law, and statute law is sometimes called the written law.

2 PRKLIMINARV TOPICS [Ch. I

1 . Common /,r:c'. The common law is llicrefore the law declared by judi;cs in the decision of cases. It rests primarily upon custom, because in deciding cases the judges seek to give effect to the prevailing customs of the people in their relations and dealings with each other. But when a point of law is once decided, subsequent judges in the same jurisdiction follow it as a precedent, and the point is said to be decisively setded. This is known as the doctrine of sftrn- decisis, — the doctrine that courts must stand by decided cases, uphold precedents, and maintain former adjudications. With the lapse of time, therefore, the greater number of the ordinary questions that may arise have been thus settled and the common law established. The rules must be sought in the printed reports of the decisions of the courts.

2. Statute lazv. Statute law consists of the enactments of legislatures. These may be for the purpose of changing some rule established by the courts when, for example, the development of society makes the continuance of the old rule inexpedient, or for the purpose of codifying into a brief statute the rules scattered through hundreds or even thousands of volumes of reported cases. The whole law of negotiable instruments has been thus codified in England and in many of our American states (see sect. 97 post).

For the law of any state, therefore, one must consult the statutes of that state and the reports of its courts. In some states the reports are very numerous. For example, there are in New York upwards of one thousand volumes, in Massachusetts more than two hundred volumes, and in all the states combined, over ten thousand volumes. A statute or decision is not binding except in the state where enacted or rendered. Hence it follows that the law may be one way in Massachusetts and just the opposite in New York. As we have the federal Congress and courts, and forty-eight state legislatures and courts, not to mention territories and dependencies, it will be seen that the American law may present many diverse enactments or decisions upon the same question. This is what makes it very difficult in this country to present a statement of the law which is correct for every jurisdiction.

3. Business law. Business law is that portion of the general law which governs business transactions. While the term is frequently used as if it denoted a distinct body of law susceptible of accurate definition, it is in reality a term of vague meaning. One engaged in business transactions may be confronted with

§4] DIVISIONS OF THE LAW 3

legal questions involving almost any topic of the law, and hence might need advice from an expert or might in simple cases be able to solve the difficulty for himself. The most that any law book for business men can well undertake to do is to present the elementary principles governing the ordinary business transactions, leaving for lawyers the more intricate or technical problems. The chief aim of such a book should be to inform the business man how to keep out of difficulties, rather than to enable him to extricate himself after he is once involved.

Business law is, therefore, merely such a selection from the general body of the law, and especially the law of contract, as a particular author may think it profitable for a business man to know.

4. Divisions of the law. The law may be divided into two great branches, public law and private law.

1. Public laze. Public law includes those topics with which the state, that is, the public as a whole, is especially concerned : namely, (a) international law, or the law governing the relations of one nation to other nations ; {b) constitutional law, or the fundamental law governing a nation or state in its relations to its citizens ; {c) criminal law, or the law by which the public protects itself against crimes and offenses prejudicial to its well-being ; and {d) administrative law, or the law under which governmental affairs are carried on, as tax laws, highway laws, and the like.

2. Prii'iitc lati'. Private law includes those topics with which individuals are particularly concerned in their private relations. These are very numerous but may be roughly grouped under three main heads : namely, {a) the law of property, including accjuisition, ownership, possession, security, alienation, descent, and the like ; (b) the law of obligation, including contracts, torts, trusts, and the like ; and {c) the law of procedure, or the law by which cases arc brought into courts and conducted to trial and judgment.

The to])ics treated under the head of business law are those involving either the law of property or the law of obligatif)n. The acquisition and disposition of property, the making and performing of contracts, constitute the major i)art of a business enterprise.

4 PRELIMINARY 'IX)1MCS [Ch. I

5. Property. Property consists in the ownership of material objects, or the ownership of some rij;ht in or to a material object, or the ownership of some riglit against a person, or the ownership of some immaterial right to be exercised to the exclusion of others. Material objects are either immovable, like land, or movable, like coin, cattle, or merchandise. One may own and possess these things, or he may own a right in them, as when he has a right to cross another's lands or a right to sell another's goods pledged to him for a debt. Immaterial property may consist in a right granted by statute or usage to the exclusion of others, as a right to a patent or to a trade-mark ; or it may consist of a right against a person, as a right to compel him to pay a promissory note or to pay damages for a trespass to property.

The law regards property as either real property or personal property.

1 . Real property. Real property consists of any estate or interest in lands, except a leasehold estate for years or a mortgage or lien. There are two such estates : an estate of inheritance, or, as it is often called, an estate in fee, which is an estate that descends to the owner's heirs ; and an estate for life which terminates at the death of the owner or of some other designated person (see sect, i6o post).

2, Personal property. All other property is personal property. This includes (i) chattels real, that is, leasehold interests in lands ; (2) chattels personal, that is, all other kinds of property, consisting of the following classes : {a) corporeal movable objects; ib) incorporeal rights or privileges, like patents, copyrights, trademarks, and good will in a business ; {c) rights of action against persons, called choses in action {choses is the French for " things ").

The kinds of property with which business is chiefly concerned are corporeal movable objects and choses in action. The former are goods, wares, and merchandise ; the latter are negotiable instruments, stocks and bonds, mortgages and liens, and debts in general.

6, Legal obligations. Legal obligations are those which the law enforces. They arise either by agreement or by the policy of the law, independent of an agreement.

§6] LEGAL OBLIGATIONS 5

1. Contract. An agreement enforceable at law we call a contract, and the failure or refusal to carry out the agreement we call a breach of contract.

Exatnple i . A agrees with B that A shall sell and B shall buy A's bicycle tor S30. This is a contract. If either party refuses to carry out his part of it, the other has a case at law for damages.

Contracts have to do with a great variety of interests, and many special kinds of contracts may be enumerated, such as contracts of sale, contracts of bailment, contracts of carriage, contracts of insurance, contracts of partnership, contracts of guaranty, contracts for the loan of money, and the like.

2. Tort. The obligations fixed by private law independent of agreement have no specific names, but the breach of any of these obligations is called a tort, which is simply the French word for "' wrong." Many of these torts have specific names.

Examples: 2. A strikes B in anger. A has committed the tort called assault and battery.

3. C goes without permission on D's land. C has committed the tort called trespass.

4. E speaks false and malicious words derogatory to F's character. E has committed the tort called slander. If E writes the words, the tort is called libel.

5. G drives so carelessly in the street as to run into and injure H's carriage. G has committed the tort known as negligence.

In each of the above cases the wrongdoer was under an obligation fixed by the law not to infringe the personal security or property rights of another to his damage, and to use due care for the safety of others and their property. The violation of this obligation constitutes the tort.

Where, in the formation of a contract, one party knowingly makes a false representation to the other, a tort is committed. Where, after a contract is made, a stranger to it induces one of the parties to break it, a tort is also committed.

Examples ; 6. A wishes to sell sheep to B. He tells B that they are sound and healthy. He knows they are diseased. B buys the sheep and afterwards discovers that they are diseased, (a) There is a contract between A and B. (6) There is a tort, known as deceit, committed by A.

7. A agrees to work for. B. X, knowing this, induces A to break the contract. .X has committed a tort which has no very specific name. It is called " inducing breach of contract," or, in this form of contract, " enticing away a servant."

6 PKKI.IMINARV TOPICS [Cii. I

3. Qtiasi-iontniits. In certain cases where there is no true contractual ajjjrcenient, the law, by reason of some act or situation of a party, imposes an oblii^ation ui)on him and gives a remedy against him, as if, in fact, his obligation did arise from agreement. In order to prevent unjust enrichment and to give an etlicient remedy, the law indulges in such cases the fiction that a promise was made, and permits an action in the form of an action on contract. These cases are called quasi-contracts, because the form of remedy is like that in the case of a true contract.

Examples : 8. A steals B's money. B may recover the money in a contract action, there being by fiction of law an implied promise to repay it.

9. C by mistake pays D more than he owes. C may recover the excess in a contract action. The law implies a promise by D to return the overpayment.

10. E is a lunatic, known to be one, and incapable of making a contract. F furnishes E with necessary food. F may recover the reasonable value of the food in a contract action. The law creates the promise of the lunatic to pay for necessaries.

4. Tnists. A trust is an obligation of one who has the legal title to property to account for it to one who has the beneficial or equitable interest. Trusts are not recognized or enforced by the courts known as the law courts, but by the courts known as the equity or chancery courts. These courts are explained in the next section. Law courts recognize only legal titles and interests, but equity courts recognize equitable titles and interests.

Example il. B' conveys or wills his farm in trust to C to receive the rents and income and pay the same over to D. This is a trust. D's rights are not recognized by the law courts, but the equity courts recognize and enforce D's rights and compel C to account to D for the rents and income.

The so-called " trusts " referred to in current economic discussions are not now trusts in the above sense, but are simply monopolistic combinations. Originally stockholders in various corporations placed their shares in trust with a committee, and the total profits of all the corporations were divided among the various stockholders p7o I'ata, thus constituting a real trust. But it is now the custom to unite all the corporations into one corporation, in order to eliminate competition. This does not create a true trust, but the old name continues to be used to describe the new monopolistic device.

7. Courts. The courts of a particular state -^ay consist of law courts and equity courts, although in modern times these

§.7] COURTS 7

are often combined. The United States has also an admiralty court, or rather a court with admiralty jurisdiction.

1. Law courts. Law courts are organized tribunals for the trial of cases and the hearing of appeals. Each state has trial courts and at least one court to which appeals may be taken. Trial courts consist of a judge and a \\iry, with attendant officers. Appellate courts consist of a bench of judges without a jury.

The trial courts are generally the following :

a. A court of general jurisdiction is one before which most cases may be brought. This is usually called a circuit court, because the judges go on circuit from place to place to hold trials.

b. Courts of limited, or local, jurisdiction are for the trial of smaller cases ; such are county courts, city courts, and courts held by justices of the peace,

c. Courts for the administration of the estates of deceased persons are called the surrogate's court, probate court, orphans' court, etc.

The appellate courts are those to which appeals are taken from the trial courts. Most states call the appellate courts the Supreme Court. In New York, however, the highest appellate court is called the Court of Appeals, and the trial court of general jurisdiction is called the Supreme Court, Owing to the large amount of appellate work, some states have an intermediate appellate court. In New York this is called the Appellate Division of the Supreme Court,

In the federal jurisdiction the trial court is the District Court ; the intermediate appellate court is the Circuit Court of Appeals, and the highest appellate court is the Supreme Court,

2. Equity courts. Side by side with the common-law . courts there grew up in England a separate court known as the equity court or the chancery court. This court consisted of a judge without a jur\', and was intended to give relief in hard cases where, by the somewhat rigid rules of the common-law courts, none could be had. A body of rules or doctrines evolved by this court is known as equity. Equity consists, therefore, of the rules and doctrines by which equity courts arc controlled in the administration of justice.

8 I'KKLIMINARY TOIMCS L<-'"- I

In a few of our stales sueh separate equity courts still exist, but generail)- the powers of a common-law court and of an equity court have been combined in one court which administers both law and equity. In such case the court of general jurisdiction is both a common-law and an equity court. If one wished to sue for broach of contract or for an accounting for a trust, he would go before the same court : in the contract case the judge with a jury would administer law rules ; in the trust case the judge without a jury would administer equity rules.